Apr 20, 2012

The summer doldrums

The boxed beef cutout value had a nice rally last week, up about $7, and it brought fed cattle values up a little bit with it. Still, the weak aspect of the market is slaughter level. The industry needs to start processing cattle in the mid 600,000-head range and get this summer demand going. It looked like it was going to start last week, but analysts expected kill levels to remain at 600,000 head.

Packer margins improved dramatically this last week with the advance in beef prices; they are now losing just $30 per head. This is quite an improvement from the $100 they were losing two weeks ago. These improving margins should help them justify larger kills in the weeks to come and good weather should stimulate the grilling season we’ve all been waiting for.

Cattle slaughter has been a problem the past few weeks. Two weeks ago, the industry estimated that 582,000 head were processed, down from 662,000 the week earlier. The same week last year, there were 645,000 head processed, which represents a shortfall of 63,000 head in one week compared to a year ago. Last week, slaughter was improving, 11,000 head higher than the prior week through Wednesday, so let’s hope the summer rally is starting. Year-to-date cattle slaughter is down 493,000 head from a year ago. Beef production is down 3.4 percent from a year ago, and slaughter is down 5.1 percent from the same point in last year’s slaughter.

The cattle on feed report came out last Friday and was expected to show 2 percent more cattle on feed compared to last March. Marketings for March were very slow; analysts expect to see March marketings down 5.5 percent with one less marketing day. The big concern was placements. Market analysts had a wide opinion as to how many cattle were placed into feedlots; estimates ranged between 3.4 percent to 11.4 percent fewer cattle placed into feedlots. Analysts say the year-over-year decline is not that surprising given the large number of cattle placed on feed a year ago last March.

Marketings need to pick up so we don’t build up any additional inventory of finished cattle. We’ve had lower placements into feedlots since the first of the year but it doesn’t seem to be able to pull the ready supplies of cattle down much.

Most market analysts seem to agree that feeder cattle placements will be below year ago levels throughout summer. At some point, the total number of cattle on feed will be below year ago levels.

The next few weeks are critical for cattle feeders and selling enough cattle to maintain current inventory.

Analysts say that retail meat buyers are not buying into the future for retail features. They are still buying beef as they need it, and are not contracting for summer features. One could say that the caution flag is up in all segments of the beef and cattle industries. However, cattle feeders are still buying replacement cattle at very high prices.

This summer looks like it could be a rough one on cattle feeders and meat packers. The crop planting intention report USDA published last week does have a positive spin on it for livestock producers. The forecast is that corn farmers will be planting 96 million acres of corn and many are getting their crops in early; roughly 17 percent of the corn crop is already in the ground and in some areas, it’s knee high. If we have a normal growing season and can maintain trend line yields of 160 bushels per acre, we could produce a corn crop of 14.1 billion bushels and establish a new production record. The last record was set in 2009 with 13.1 billion bushels of corn.

Also, farmers are planning on producing more hay—more good music to cattlemen’s ears. Hay growers are planning to grow 57.3 million acres, a 3 percent increase from 2011. California hay growers are planning on an 8 percent increase alone. Texas farmers are planning on 700 thousand more forage acres and Oklahoma farmers are planning on another 400 thousand acres. After last year’s drought, you could assume ranchers in those areas are not going to get caught short of hay again.

It looks like the big losers in the farm ground battle are soybeans and cotton. And it looks like we’re going to have a good wheat harvest that will carry livestock feeders through the summer. Old crop corn is in short supply and will be expensive until the new crops are in. It will be a tenuous summer and I expect every USDA crop report to contain marketmaking news and have a whipsaw effect on the markets. But it does look like there is a good chance for feed costs to decline dramatically this next fall. This should support feeder cattle prices and allow cattle feeders to make a buck. — PETE CROW